Many people consider taking out a home loan or investing in a Systematic Investment Plan (SIP) when buying a new home. Both options have pros and cons, and understanding them is crucial to making an informed decision.
Twenty-five years EMI or Ten years investment: Which is the closest way to owning a Rs 80 lakh house? Some may suggest a home loan when considering the best way to realize your dream of homeownership.
However, a Systematic Investment Plan (SIP) is also a wise option. By starting a SIP in a mutual fund, you can realize your dream of owning a home in half the time it takes with a home loan.
Home Loan vs SIP: Which is Best for You?
a) Home Loan: You Work for Money
A home loan is a financial product that allows an individual to purchase a property by borrowing money from a financial institution. The loan is repaid in regular installments over a predetermined period, usually several years.
One key advantage of a home loan is that it enables individuals to own a home without paying the entire cost upfront. Home loan interest payments are also often tax-deductible, providing some financial relief.
However, it’s essential to consider that taking out a home loan means taking on significant debt, and interest payments over the loan tenure can result in a higher overall cost of purchasing the property.
Also, the eligibility criteria and interest rates for home loans can vary significantly between lenders, so shopping for the best deal is essential.
b) SIP: Money Works for You
On the other hand, a Systematic Investment Plan (SIP) is a method of investing in mutual funds where an individual sets aside a fixed amount of money at regular intervals, typically monthly.
SIPs offer the advantage of rupee cost averaging and the potential for long-term wealth creation through the power of compounding.
By investing a fixed amount regularly, investors can benefit from market fluctuations and lower the average cost of their investments over time.
However, it’s important to note that SIPs are subject to market risks, and the returns on mutual fund investments are not guaranteed. Additionally, the liquidity of investments made through SIPs may be lower than that of other financial products.
Let’s take the example of two friends, Ramesh and Suresh.
Both have the same age and income and are striving to own homes. Ramesh opted for a home loan and achieved his dream of owning a house early, while Suresh pursued investments. Let’s see what happens next.
In a home loan: Ramesh took a home loan of Rs. 80 lakhs for 25 years at an annual interest rate of 9%. His monthly EMI was Rs. 67,136, and he had to pay Rs. 2,01,40,800 over the 300-month loan term, with more than Rs. 1.2 crores going towards interest.
In SIP investment: At the same time, Suresh invested the same amount in an equity mutual fund and received a 12% annual growth. He invested a total of Rs. 80,56,320 over 10 years at the rate of Rs. 67,136 per month. Additionally, he received another Rs. 75,41,996.
Suresh had Rs. 1,55,98,316 in just ten years. He continued his investment for another two years and received Rs. 2.2 crores. He invested Rs. 96,67,584 and gained a profit of Rs. 1,19,67,138. Compared to Ramesh, Suresh took ownership of the house in half the time, i.e., 12 years. He purchased the house of his choice with his money and avoided the debt burden.
With Rs. 50,000 per month: Suppose you invest Rs. 50,000 monthly in a SIP and pay the remaining amount for a rental house. Your investments will amount to Rs. 60 lakhs over ten years, and you could earn Rs. 56,16,954. If you continue for 12 years, you could earn an additional Rs. 89,12,609. Therefore, SIP investments can be considered better than home loans.
Remember that mutual fund investments are subject to stock market risks, and profits and losses are natural. Hence, before investing, one should thoroughly read the respective fund documents before making any decisions.
However, long-term investments have the potential for high profits, though one should consider the individual risk involved. Also, remember that interest rates on home loans and returns on SIP investments may vary.
Ultimately, the decision between a home loan and SIP depends on individual financial goals, risk tolerance, and personal circumstances.
Some individuals may prefer the security of owning a home through a loan, while others may be drawn to the potential returns of systematic investment plans. It’s important to carefully assess both options and consult with a financial advisor to make an informed decision that aligns with your needs and goals.